- EUR/USD trades on the back foot due to the Euro’s weakness and increasing US Dollar strength.
- The Euro depreciated on Tuesday due to lower inflation data; the Dollar benefited from strong jobs data.
- An escalation of the conflict in the Middle East has further increased safe-haven flows to USD.
EUR/USD trades little changed in the 1.1060s on Wednesday, after the pair fell from 1.1135 on Tuesday, in a sell-off that amounted to a 0.60% one-day decline.
Lower-than-expected Eurozone inflation data was partly responsible for the sharp decline. The bloc’s Harmonized Index of Consumer Prices (HICP) grew by 1.8% YoY in September, down from 2.2% previously and below expectations of 1.9%. Core inflation, meanwhile, came out at 2.7% YoY – one tenth below August’s 2.8% reading and also below expectations.
The data indicates headline inflation has fallen back down below the European Central Bank’s (ECB) 2.0% target, and that core is on its way. It increases the chances that the ECB will cut interest rates further, which, in turn, is likely to lead to capital outflows and a weaker Euro.
Just-released US ADP Employment Change data showed a rise of 143K private payrolls in September, which was above the upwardly-revised 103K in August and expectations of 120K.
The Eurozone Unemployment Rate, released on Wednesday, showed unemployment remained steady at 6.4% in August, which was unchanged from July’s figure and in line with economists’ expectations.
EUR/USD: declines exacerbated by stronger USD
EUR/USD was also pushed lower after a recovery in the US Dollar (USD) on Tuesday.
The Greenback gained after the release of data showing a higher-than-expected rise in the number of job openings in the US, as measured by JOLTS Job Openings, which rose to 8.04 million in August from a revised-up 7.71 million in July, and beat expectations of 7.66 million.
The data is significant because of the Federal Reserve’s (Fed) recent shift to focusing on concerns around the labor market. This broadly offset weaker US manufacturing activity data as measured by the ISM Manufacturing PMI, which flatlined in contraction territory and missed expectations in September.
EUR/USD also sold off amid an escalation in geopolitical tensions in the Middle East, which increased safe-haven flows to the US Dollar. On Tuesday evening, Iran fired about 200 missiles, including some ballistic, at Israel’s capital Tel Aviv in a revenge attack after Israel killed Hasan Nasrallah, the head of the Iran-backed militia group Hezbollah.
Technical Analysis: EUR/USD possibly beginning descent within multi-year range
EUR/USD has been contained within a broad multi-year range that has a ceiling at roughly 1.1200 and a floor at around 1.0500. The pair is currently testing the top of the range but after multiple touches appears to be pulling back down.
EUR/USD Daily Chart
EUR/USD is probably in a sideways trend on all its key timeframes (short, medium, and long-term) and since it is a principle of technical analysis that “the trend is your friend” the odds favor a continuation of this sideways trend, which in this case means move back down towards the range lows.
Prices now appear to be beginning a down leg. They have reached a key support level in the form of the red 50-day Simple Moving Average (SMA) at 1.1041, which is likely to slow the sell-off at least temporarily.
For confirmation of the start of a proper leg down prices should break through the 50-day SMA, the trendline for the last up leg, and the September 11 swing low at 1.1002. A close below 1.1000, therefore, would provide strong bearish confirmation. The downside target for such a move would be 1.0875, the 200-day SMA, followed by 1.0777 (August 1 low) and then 1.0600.
Momentum as measured by the Moving Average Convergence Divergence (MACD) is relatively bearish over the last few days and the blue MACD line has crossed below the red signal line, suggesting more evidence the pair could be vulnerable to further weakness.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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